22 Feb kentux ltd has recently completed a strategic valu
kentux ltd has recently completed a strategic valuatiin of its products and has concluded that excellent exists for an updated version of an existing producg the worm an excellent and electronic problem solver. the development director feels that with more powerful software, a redesigned shell and sophusticates marketing sales could be quite healthy for a dew more years until technological developments make the product relatively uncompetitive. the software ciuld be used under licencing agreement requiring initial fee of 2.5million and annual payments at the end of each year of fice percent of sales. the tax authoritt has ruled that the lump sum initial payments on such licensing agreements are of a capital nature, attracting 25% reducing balance caputal allowances although it has indicated that the annual payments are allowable against tax. sales of worm are expected to be 8million per yer initially, with sales growth of five percent per year over five years. at the end of fice years, it is expected that technological obsolescence will cause sales to decline by fifty peecent per year. after threee years of declinig sales, the product will have to be withdeawn. redesign of the sales shelk containing the electronics and the display screen will cost 2milkion. the deelopment director expects that working caoital needs will increase by 680000 during the first year and that this additional amount will grow by five percent per year in line with sales. once sales start to decline, this additional working capital will be released proportiinately with the decline in sales. marketing of the worm will cost 3million spread evenly over the first three years of the project. director costs of production, including raw materials are expected to be 65percent of sales, in order to maintain groth in sales, it is exoected that furtherr redesign will be needed in year 4 at a cost of 2million. the tax authority has ruled tgat the redesign costs may be capitalised and will attract capital allowances at a rate of 25% on a reducing balance basis. corportion tax is levied at a rate of 30%. kentus has a standing agreement with the tax authority to be paying 75% of taxes one year later and the remainder in the following year. the current cist of capital for kentus is 14% per annum calculate the NPV of this project and advise the management on whether or not it must be taken and what shohld be the percentage increase or decrease in the cost of capital for kentux that would make the project worth or unworthy show your workings clearly
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